Bundling and Product Reputation

Bundling experience goods reduces the incentive of firms to shirk on product quality. We use a repeated game model to analyze product quality decisions with and without product bundling. When consumers are small, receive imperfect private signals of product quality, and have heterogeneous preferences over available products, then free riding interferes with punishing the firm when it shirks on product quality. Product bundling constrains consumers to use collectively optimal monitoring and punishment strategies. Bundling is even more effective when consumers cannot observe which of the providers of complementary goods and services is responsible for poor product performance. By bundling, a firm internalizes the externality that one low quality product has on the reputation of its other products.